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Catching a Falling Financial Knife

Gold, Stocks Sell Signal

Commodities / Gold and Silver 2013 Dec 19, 2012 - 10:47 AM GMT

By: Brian_Bloom

Commodities

The sell signal is not yet definitively bearish because even at $1560, gold will be “trading” within the confines of a well established range. Nevertheless, the target measured move of $1109 on  the 3% X 3 box reversal P&F chart looks less ridiculous than it did a few weeks ago. 


As an aside, I have been bemused by how “easily” some commentators have been able talk about a single element of the financial market – the Fed – having the implicit ability to “control” the US economy.  Clearly (to me at least) if the Fed embarks on QE to Infinity, the implicit assumption of these commentators is that “The Market” will just watch breathlessly whilst sitting on its hands. Clearly (to me at least) The Market will not just sit and watch. As the risks of inflation rise, so the risks of borrower defaults in the Private Sector Capital Markets will also rise, and Private Sector interest rates will inevitably rise to offset those  risks. With its $40 billion (or so) mortgage purchases per month, The Fed may or may not eventually “control” 100% of the mortgage market through Fanny Mae and Freddy Mac. But even if 100% of all domestic mortgages are 30 year loans at low fixed rates, what about Credit Card rates, Hire Purchase Finance rates, Overdraft Rates, Consumer loan rates, Other?

In my view, 2013 will be a watershed year because 2013 will be the year  when reality finally bites. This doesn’t necessarily imply economic collapse. Indeed recognition of “reality”  may be a good thing. When people stop kidding themselves and lying to each other, then consensus on significant economy management action is likely to become politically achievable, and the following seems at least possible, if not  likely:

1.       Eligibility for US government funded pensions will become subject to asset/income testing

2.       Retirement age will be pushed out by between 2 and 5 years.

3.       The US will give up on its objective of being “The World’s Policeman”. The last time I looked, US Defence Spending was greater than the Defence Spending of the rest of the world combined.

4.       Medical over-servicing will be significantly curtailed as health care budgets are cut;  which will lead to “personalised medicine” becoming a subject of intense focus.

5.       Because of rising risks in the Private Sector Capital Markets, rental of domestic property will become a more viable proposition from the perspective of property owners – which implies a fall in Real Estate capital values and a rise in rental returns. In turn, this will render it obvious to even an intellectual hunchback that Fanny Mae and Freddy Mac are hopelessly insolvent by any commercially acceptable yardstick. (Explanation: The idea of the Fed funding Fanny Mae and Freddy Mac purely by printing money is nothing short of a cockamamie, hair-brain scheme when it is seen in context of the Capital Markets as a whole. The Fed cannot possibly aspire to control the entire world’s capital markets. Such an aspiration is pure lunacy. For one thing, the US Dollar does not exist in a vacuum.)

6.       “Rorting the system” will become ever more difficult as reality bites. For example, Government incentives for building emerging, innovative businesses will be linked to employment opportunities created and will be forfeited/refundable if those opportunities are not created.

7.       Voters will eventually come to understand that salaries of executives of large organisations should not automatically be higher than salaries of executives of high growth businesses because it requires far less “talent”  to manage a large organisation with an already existing momentum in the market place. Some form of controls will need to be introduced whereby the CEO of any corporation cannot earn more than a Board nominated (of course, generous) multiple of that corporations’ average executive earnings, benchmarked against similar standards for similar organisations at similar points in their life-cycles. It will follow that if a CEO wants to earn super income then he will have to accept part of his salary in shares (taxable as income) and work to raise the value of those shares against a (say) rolling 10 year median benchmark P/E ratio of the market as a whole.  It does not take a rocket scientist to raise prices (and profit margins) in an oligopolistic competitive environment. Such behaviour is socially counterproductive and should be punished – not rewarded. This is not a “socialist” view - it is quite consistent with the concept that adding value should be appropriately rewarded. Arguably, raising prices (and margins) does not add value to anyone other than the price gouger. Arguably, such behaviour serves to undermine economic momentum.

With the above in mind, count this analyst  as one of those commentators who does not think that the Equity Markets will be higher in December 2013 than they are in December 2012.

Brian Bloom

Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com

Beyond Neanderthal and The Last Finesse are now available to purchase in e-book format, at under US$10 a copy, via almost 60 web based book retailers across the globe. In addition to Kindle, the entertaining, easy-to-read fact based adventure novels may also be downloaded on Kindle for PC, iPhone, iPod Touch, Blackberry, Nook, iPad and Adobe Digital Editions. Together, these two books offer a holistic right brain/left brain view of the current human condition, and of possibilities for a more positive future for humanity.

Copyright © 2012 Brian Bloom - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Brian Bloom Archive

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Catching a Falling Financial Knife